The duties of a trustee

There are three places where your assets are likely to go after you pass: the government, charity or friends and family. If your money is going to go to friends and family, consider placing it in a trust, which can be structured to help protect your assets from creditors. A trust, a legal vehicle that enables a trustee to hold assets on behalf of a beneficiary, can give your family the freedom they need to enjoy those assets as if they owned them outright. When putting your assets in a trust, though, how do you go about electing a trustee?

The choice generally comes down to a family member or professional. When you are faced with selecting a trustee, consider your state’s guidelines. In California, for example, the governing statute states that the trustee administer the trust with “reasonable care, skill and caution under the circumstances then prevailing that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character with like aims to accomplish the purposes of the trust as determined from the trust instrument.” That is the standard that both corporate and individual trustees are all held to.

The following are other items to consider when selecting a trustee:

Trustees should avoid conflict

Trustees are responsible for managing a trust in a way that avoids conflicts of interest and ensures it is administered in the best interest of the beneficiaries. The trustee should not use the trust assets for the trustees’ own profit and must avoid any adverse interests that conflict with those of the beneficiaries. While this sounds fairly straightforward, consider a scenario where a family business is owned by the trust and a key executive who runs the business is also a potential trustee. If that person is selected as a trustee while also running the business, it could lead to a conflict of interest.

Trustees should deal impartially with beneficiaries

Think of today’s world with blended families. If you are a trustee of a trust that pays out to a second spouse or the children of a prior marriage, every decision is going to be looked at very carefully by two competing groups. Every decision you make and how you invest or distribute the trust is going to be examined. A trustee has to enforce and defend claims of the trust. For example, if the trust owns an apartment building and the tenant leaves, the trustee may need to take action to recover the lost rent. Not everyone has the time or the energy to do that.

If there are multiple trustees, they must make sure they are each participating in the trust in an active way. It is your responsibility to monitor what the other trustees are doing so if someone is acting improperly, you may have to bring it to the attention of the courts. All of these responsibilities apply whether or not the trustees are receiving compensation.

A trustee who does not live up to the standards of the trust or does something that results in a loss to the trust maybe held personally responsible. The court has the authority to surcharge a trustee, so it is important to consider that liability as criteria when selecting a trustee. Keep in mind that any loss may or may not be able to be covered by the trustee. Make sure to verify whether the trustee has an insurance policy and is able to cover potential liabilities.

Consider a revocable trust in case someone can’t continue as a trustee anymore

The successor trustee would then take over managing the resources without having to go to court and have a conservatorship. Bear in mind, though, that the trustee of the revocable trust might not be the same person managing the person’s personal needs – such as health care or medical decisions – and they might also be acting as a power of attorney or conservator. When setting up the plan, make sure that the trustee and the person overseeing any personal needs get along and have a common outlook. One person managing the care may want the highest level of care while the person managing the trust may not want to spend the money. In this case, a judge will end up deciding how much to pay.

How to choose a trustee

When selecting a trustee, you have a number of choices: an individual trustee, a co-trustee, a corporate trustee or a hybrid of individual and corporate trustees. When making that selection, be very thoughtful about how that trust is going to operate and what the role of the trustee is versus the beneficiaries. Talk to all parties and make sure that they are willing to take on the responsibility, as it does mean exercising discretion. Co-trustees in the right situation can be a real plus, as it involves sharing the more labor-intensive and time-consuming administrative responsibilities. A recent trend is a combination between a corporate trustee who keeps the records, sends out the account statements, has custody of the assets, and makes sure the rents are collected and the taxes are paid on time, while a combination of individual trustees who have a different channel of communication with the beneficiaries may be involved with family business and are involved with strategic decisions without the burden of the day-to-day administration.

If you have a minor child and are naming a guardian in your plan, consider their ability to work effectively with the trustee responsible for financial decisions. This coordination can be particularly important when making decisions about education expenses.

The bottom line

Choosing a trustee is an important part of planning the distribution of your assets. There are several key factors to consider when making the decision of who to elect. You should consult your own estate planning attorney regarding the designation of a trustee.

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